Market Update - January 2011
Mon 10 Jan 2011
The London property market witnessed a relatively strong performance during the first half of 2010 with prices in many prime central locations returning to if not exceeding 2007 peak levels. Prices stabilised in the second half of the year as supply levels strengthened and demand began to level off. For the year as a whole, the Marsh & Parsons prime central London index recorded a 4.7% increase in average prices.
Although the property market will face a number of challenges in the year ahead, the central London market is expected to continue to outpace the rest of the UK, with demand from cash buyers and overseas investors remaining strong. As a result, the pace of inflation is expected to be similar to 2010.
The London economy returned to positive growth during the second quarter of 2010 according to latest figures published by GLA Economics with the annual growth rate, measured in terms of value added, reaching 2.4%. This is compared to an upwardly revised figure of -0.1% for the first quarter. This is compared to growth in the UK economy which reached an annual rate of 1.7% in quarter two.
Most recent figures published by National Statistics for the UK economy reveal that growth continued to strengthen during quarter three with the volume of GDP rising by 0.7% during the three month period bringing the annual rate to 2.7%. This improvement reflected an increase in investment expenditure growth to a quarterly rate of 3.4% compared to 1.0% in quarter two. However, growth in the volume of exports, consumer and government expenditure all weakened during the three month period to 1.5%, 0.3% and -0.4% respectively. Furthermore, growth in imports at 1.7% exceeded exports further dampening the overall growth rate during the quarter. This highlights that the recovery in the economy remains tentative.
The latest Lloyds TSB PMI index of business activity in London stood at 54.6 points in November. This represents the third consecutive month where the index was greater than 50, whereby any figure greater than 50 indicates an increase in activity. The new orders and employment portions of the index were also above 50 at 54.9 and 50.3 points respectively. These figures coupled with the positive UK growth figure for quarter three would suggest that growth in the London economy continued to strengthen during the second half of 2010.
Consumer prices increased to 3.3% in November from 3.2% the previous month according to latest figures from National Statistics. This rate remains considerably greater than the target 2% rate, and is expected to rise further in the short term as the VAT increase in January and rising commodity prices take effect. Despite this, the Bank of England has left key lending rates unchanged at a historical low of 0.5%.
London Property Market
Following a strong start to 2010, the pace of price inflation in the prime central London market began to ease gradually during the remainder of the year as stronger supply levels and cautiousness among consumers coupled with tighter lending conditions took their toll on the property market. The latest results of the Marsh & Parsons index show that average prices in the prime central London market remained relatively stable during the final two months of the year following a moderate decline in October. As a result, the index recorded a 0.6% reduction in average prices during the final quarter of 2010. This is compared to relatively robust growth of 3.9% during the opening quarter of the year.
For the year as a whole, average prices in the prime central London market rose by 4.7%. It must be noted however, that there was a marked difference across locations. In particular, Fulham recorded the strongest growth during the year at 13.6%. This was followed by North Kensington with growth of 8.1%. In contrast, average prices in Barnes declined by 1.2% during the twelve month period.
An analysis of a sample of properties traded by Marsh & Parsons reveals that first time buyers were the largest purchasing cohort during 2010 accounting for 39% of all transactions during the twelve month period. Demand from this group was particularly strong in the final quarter of the year representing 42% of properties traded compared to 35% in the quarter one. First time buyers were particularly active in Clapham, Balham and North Kensington, accounting for over half of all transactions in these locations during the year.
The proportion of individuals purchasing a second residence also increased during the year to 16% of transactions in the final quarter compared to 6% in quarter one. As a result, for the year as a whole this group accounted for 13% of properties traded. In contrast the proportion of investors active in the market declined considerably during the year to reach 13% of all purchasers in quarter four from 22% in quarter one. Over the twelve month period, investors accounted for 17% of all transactions. Investor activity was particularly strong in Holland Park and Kensington, where this cohort was responsible more than a third of all transactions.
The share of properties purchased by individuals trading up also declined, although at a more moderate pace to 22% of all purchasers in quarter four compared to 27% in quarter one. For the year as a whole, individuals trading up accounted for 22% of properties traded. Barnes and Battersea witnessed significant demand from this purchasing group comprising approximately 45% of all transactions in these locations.
Cash buyers remain key players in the central London market accounting for 37% of all properties traded during 2010. Approximately 35% of all transactions in quarter four were purchased by cash buyers. This proportion remained relatively stable throughout much of the year peaking at 43% in quarter two. Cash buyers were predominantly active in Chelsea and Kensington accounting for 69% and 59% of all transactions in these locations respectively. In Notting Hill and Pimlico, just under half of all properties sold during the year were purchased by cash buyers.
The proportion of properties purchased by overseas investors in the central London market remained relatively stable throughout 2010 at 16%. The largest share of these investors, 41%, was from the Eurozone, the majority of which, 43% were Italian. A further 11% were from the rest of Europe while 18% were from Asian countries, primarily Hong Kong, China and Singapore.
On the supply side, the central London market witnessed a marked improvement in stock levels during the opening months of 2010 following shortages throughout much of 2009. Figures from Marsh & Parsons reveal that the numbers of properties available for sale or under offer at the end of March were 47% ahead of the same period in 2009. There were further improvements during the second quarter, while stock levels stabilised during quarter three. In the final three months of the year, however, stock levels began to taper off with the number of available properties at the end of the year approximately 26% greater than those seen at the end of 2009.
Most recent figures available from the Land Registry show that the greater London region continued to outperform the rest of England and Wales with average property prices rising by an annual rate of 6.8% in November. This follows a monthly increase of 0.4%, the strongest increase recorded by the index since July 2010. The average property price in the greater London region was 341,009 in November. In comparison, average prices in England and Wales decreased by 0.6% during November bringing the annual increase to 2.2%. The average property price for England and Wales stood at 164,773.
An analysis by London borough reveals that Kensington and Chelsea recorded the largest increase during the month at 1.5%, followed by Barking and Dagenham at 1.3%. A number of locations continued to see monthly reductions however, the largest of which, -0.9%, was recorded in the boroughs of Hammersmith and Fulham and Southwark, while Brent recorded a decrease of -0.8%. A number of boroughs recorded significant annual rates of growth in November, the strongest of which was in Camden at 13.2%. Brent recorded the second highest annual growth rate at 11.7%, closely followed by Kingston upon Thames, Kensington and Chelsea and Hackney with growth rates of 11.6%, 11.4% and 11.3% respectively. The lowest annual growth rates were seen in Tower Hamlets and Bexley at 5.2% and 5.3% respectively.
The latest available transaction figures from the Land Registry are for September 2010. These reveal that the number of properties sold in the greater London area totalled 7,741 during the month, representing a decline of 1% on September 2009. This is the first annual decline recorded since June 2009. The number of properties that sold for over 1-million increased by 14% in September 2010 compared to the same period the previous year.
The level of transactions in England and Wales decreased by 6% in September 2010 compared the same month the previous year to reach 55,068. Between June and September 2010 transactions in England and Wales averaged 60,979 per month, approximately 4% greater than the same period in 2009.
The Marsh & Parsons sentiment barometer is a monthly barometer which assesses current market conditions and compares them to those seen in the previous month and the previous year. It assesses key market indicators including demand from all purchasing cohorts, viewing and applicant levels and stock levels.
The December results show that demand levels remained relatively stable across the majority of locations during the month, while supply levels declined across a large number of locations compared to the previous month. When compared to December 2009, the majority of respondents indicated that both demand and supply levels were largely unchanged, although a relatively large proportion reported that current supply levels were greater.
An analysis by purchaser cohort reveals that first time buyer demand remained stable in almost two thirds of locations during December, although the remaining 36% of locations reported a decline in demand from this group compared to the previous month. When compared to a year earlier, demand from first time buyers was unchanged in over half of all locations, while 27% of branches indicated a decline. The difficult lending conditions particularly impacted this purchasing group during the year, with very large deposits still required to secure a mortgage.
Demand from individuals trading up remained unchanged in 82% of locations during December compared to the previous month with the remainder of locations reporting a decline from this group of purchasers. Interestingly, approximately 27% of respondents purported that demand from individuals trading up was higher compared to a year earlier, although the majority, 64%, reported no change. It has been reported that are greater incidences of individuals trading up waiting to sell their own properties before committing to a purchase. This further reflects the continued difficult lending conditions, as well as greater uncertainty in the market.
Similarly, investor demand has remained unchanged across most locations, 73%, compared to November levels, although 27% of locations did report a decline from this purchasing group during the month. When compared to December 2009, over half of respondents, 55%, indicated that investor demand was the same. However, 27% purported that the level of investors had increased compared to a year earlier reflecting the higher rental returns in the market at the moment. That said, some respondents reported that lower expectations of price inflation was reducing the level of speculative investors in the market.
Demand from overseas investors remained largely unchanged across the majority of locations compared to both the previous month and the previous year. Approximately 27% of respondents did report a decline from this purchasing group compared to November levels.
When questioned about stock levels, the response was very mixed with the largest proportion of locations, 46% reporting a decline compared to November levels. This largely reflects a lack of new stock coming onto the market coupled with relatively strong transactions levels towards year end. A slightly lower 45% of respondents reported that stock levels were unchanged from the previous month. A relatively large proportion of branches, 36%, reported that stock levels were greater in December compared to a year earlier, when stock levels were very low compared to the number of buyers in the market. A further 46% indicated that stock levels were similar to a year ago.
Almost three quarters of all locations, reported a fall in both the number of applicants and viewing levels during December, reflecting the poor weather conditions during the month as well as lower stock levels. Furthermore, the largest proportion of branches, 46%, indicated that both applicant and viewing levels were lower than December 2009, while 36% reported no change.
Interestingly, all respondents purported to have an either positive or somewhat positive outlook for the year ahead. Given the various differences across locations, specific expectations about the performance of these markets in 2011 are very diverse. In particular, some locations have indicated that tight levels of supply will continue to impact transaction levels for much of the year, with some improvements expected towards the end of 2011. Other locations have suggested that 2011 will start off busy, following improvements towards the end of 2010. Demand for quality properties is expected to remain strong, particularly family homes. In terms of price inflation, predictions for the year ahead range from prices remaining relatively stable to moderate growth depending on location.
The latest RICS housing market survey reveals continued weaknesses in the UK market. In particular, supply levels declined again in November, with the new instructions net balance remaining stable at -4, where a negative figure indicates that more surveyors reported a decrease than those reporting an increase. The newly agreed sales net balance was also negative, falling to -14 from -12 in October. However, sales expectations for the next three months were positive, with the net balance standing at 6. The new buyer enquiries net balance fell further to -18 from -12 in October. The net price balance was also negative at -44, indicating an overall decline in prices in the three months ending November, although 43% of surveyors indicated that prices remained stable over the three month period.
The latest RICS residential lettings survey highlights the underlying strength of the Great Britain lettings market with continued improvements in demand and rental levels. The demand net balance rose to 33 in the three months to October, compared to 27 in the previous three month period. This indicates that 33% more surveyors reported an improvement in demand than those reporting a decline. In contrast, supply levels are tightening with the new landlord instructions net balance for the three month period standing at -7. This has put upward pressure on rental levels with the net balance at 39 for the three months to October compared to 27 for the previous three month period. Rental expectations for the next three months are also positive with a net balance of 34. London witnessed the strongest performance in rental growth during the three month period with a net balance of 86.
Gross mortgage lending for November stood at a seasonally adjusted 9.8-billion according to figures from the major UK lenders published by the Bank of England. This is almost 8% greater than the previous month and is the highest level recorded since May 2010. That said, this remains more than 10% lower than the same period the previous year. Much of the increase in November was attributable to a rise of 13.8% in the level of remortgaging during the month to reach 3.3-billion. Total lending for house purchase stood at 5.6-billion, representing an increase of 3.7%. Interestingly, gross mortgage lending for the first 11 months of 2010 totalled 104.4-billion and was only 3.2% lower than the same period in 2009. Lending for house purchase for the 11 month period stood at 61.8-billion and was 17% greater than the same period the previous year.
Bank of England figures also show that the number of loan approvals increased during the month to reach 48,019 compared to 47,315 the previous month. This is just moderately lower than the previous six month average of 48,145.
Looking forward to 2011, the UK economy and property market face a number of challenges including the introduction of austerity measures announced in the June budget such as the VAT hike to 20%, higher social insurance contributions and cuts in government expenditure. This will further increase consumer cautiousness and impede spending power. Consumer expenditure already weakened during quarter three, while the savings ratio strengthened. In addition, the GfK consumer confidence index which includes expectations for the next 12 months fell to -20 in December for the Greater London area compared to -15 the previous month. The comparable figure for the UK was -21 highlighting very weak levels of consumer confidence.
Other challenges include inflationary pressures as a result of the VAT increase as well as higher commodity prices which are likely to maintain the rate of inflation well above the target rate throughout 2011. However, it is anticipated that spare capacity in the economy should push the inflation rate back to below target in early 2012 when the VAT increase no longer impacts the figures. This coupled with the slow pace of recovery suggests that the base interest rate will remain at its current low until at least 2012.
However the recovery in the economy is expected to continue albeit it at a slow pace with latest forecasts from the Office for Budget Responsibility (OBR) predicting that the economy will expand by 2.1% in 2011 and 2.6% in 2012, following estimated growth of 1.8% in 2010. The recovery in the London economy is also expected to continue with growth likely to outpace that of the rest of the UK.
In addition, in the property market it is likely that purchasers will remain cautious during the first half of the year as they assess the impact of the various taxation measures on their incomes. However demand should improve somewhat later in the year as growth in the economy continues to improve boosting confidence levels. The prime central London property market is resilient and is predicted to continue to outperform the rest of the UK throughout 2011. Demand from cash buyers and overseas investors is expected to remain strong while limited supply levels coupled with the continued low interest rate environment is expected to sustain moderate price inflation during the year. As a result, price inflation for the year as a whole is expected to be similar to 2010, in the region of 5%.